Dealing with the Paradox of Embeddedness: The Role of Contracts and Trust in Facilitating Movement Out of Committed Relationships

Sergio G. Lazzarini (), Gary J. Miller () and Todd Zenger ()
Additional contact information
Sergio G. Lazzarini: Ibmec São Paulo, R. Quatá 300, São Paulo, SP Brazil 04546
Gary J. Miller: Department of Political Science, Washington University, St. Louis, Missouri 63130

Organization Science, 2008, vol. 19, issue 5, 709-728

Abstract: When there are constantly new, valuable opportunities to transact with alternative partners---a situation we refer to as exchange value uncertainty---long-term or committed transactions among the same individuals are discouraged. However, when opportunism creates exchange hazards, which escalate in nonrecurring transactions, individuals will be reluctant to take full advantage of the gains from switching to more valuable partners, thereby leading to “overembedded” exchanges. Instead of embracing new, valuable exchanges with strangers whose propensity to cooperate is uncertain, individuals may prefer to preserve recurring ties with familiar actors. Two mechanisms may encourage movement out of committed relationships in those conditions. First, formal contracts should serve as a safeguard to market participants, in the sense that they limit potential losses due to opportunistic behavior. Second, trust in general others (as opposed to trust in familiar people) reduces participants' perception of hazards in market exchanges, and hence promotes transactions among strangers. By increasing the propensity to initiate new exchanges, general trust also diminishes the role of contracts in causing movement out of committed relationships. In this paper, we present experimental evidence largely consistent with this theory of the interplay between formal and informal mechanisms in the determination of social mobility.

Keywords: networks; embeddedness; contracts; trust (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://dx.doi.org/10.1287/orsc.1070.0336 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:19:y:2008:i:5:p:709-728

Access Statistics for this article

More articles in Organization Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().